Saturday, 7 June 2008

Price Hikes 3

Subsidising the costs of petrol and diesel are no more feasible due to the high costs of crude oil. Continuing doing so would eventually take the nation to the road of insolvency. The price hike announced by the Prime Minister recently would also put a brake on smuggling that have rendered the nation massive economic losses.

People like Anwar Ibrahim, estranged former Prime Minister Mahathir Mohammad and Pakatan Rakyat have vested interests to demonise Prime Minister Abdullah Ahmad Badawi. They should not be looked upon as guardian angels. They are the demolition squads.

Anwar wanted Pakatan Rakyat to take over the government and he takes the post of prime minister. Mahathir has an axe to grind with Abdullah for the shelving of his vision of grandeur. Mukhriz Mahathir has lost his sense of balance and had become a chip of the old bloke.

Put any of them to run the government under the present situation you would see the same scenario. Their incessant barkings are now becoming a source of annoyance and an insult to the intelligentsia.

It is amusing to note that an article on comments made by Mahathir in his blog on the recent price hike of petrol and diesel appeared in Malaysiakini penned by one Syed Jaymal Zahiid. Malaysiakini appended a table on the price of petrol in other oil producing countries without doing an analysis and rendering of the different economic and social structures of those countries in comparison with Malaysia. The table from the said article is reproduced below:

Looking at the prices in the table any laymen would immediately conclude that the Malaysian government was wrong and could well afford togive the people cheaper price for petrol and diesel because we are oil producing nation. The purpose of the table is to mislead those who has no grasp of economics.

The writer and Malaysiakini should have shown some semblance of responsibility to explain the purpose of the table.

Malaysia is not in the same league as those OPEC countries mentioned in the table. Crude oil is not the staple food (product) of Malaysia. Our domestic consumption of oil is almost 78% of our production capacity. We are a minuscule net exporter of crude oil.

Let's take Venezuela, which has the same population as Malaysia. It produces 2.8 million barrels per day and exports 2.2 million bbl per day and consumes only 599,000, bbl per day. Its economy depended solely on export of crude oil. Almost 90% of its export earnings came from export of crude. It has the lowest price for fuel oil among OPEC members, an unimaginable amount of RM0.16 per litre.

President Hugo Chavez is doing what Mahathir has been doing for the 22 years he was in power. Instead of making strong effort to raise the income level and living standards of the people, he pampered them with all kind of subsidies just to keep himself in power. The Malaysians' mindsets are now tuned to the Mahathir's subsidy mentality.

Let us now take the other end of the spectrum, UAE (United Arab Emirates) with a small population of 4.6 millions. It produces 2.54 bbl/day and exports almost all of its premium crude. It imports around 137,000 bbl/day for part of its domestic consumptions. Although it could offer its people the cheapest price for petrol or even give it away free, it didn't. Its domestic price for petrol is MR1.19 per litre which is about the same price during Mahathir's time.

UAE is a forward looking nation and has diversified its economy to be not solely dependent on its crude oil export. Unlike Chavez of Venezuela, the rulers of UAE are fully secured in their seats and have successfully modernised and elevated the income level and living standards of the people.

Prime Minister wannabe Anwar Ibrahim said the price hike “wanton in size and callous in effect” and described the steepness in the price increase as unconscionable.

Anwar together with his former boss played equally damaging role to propagate a carrot and stick administration during his time in UMNO. He did nothing to stop the abuses when he was in the comfort zone. If you opposed the government you are seen as a security threat and are likely to be charged under the ISA. If you are a strong party supporter or a clever sycophant you would be rewarded with lucrative government contracts or given well-established public listed company on the platter that can make you an instant millionaire.

More shameful is Mahathir veiled attempt to mislead the people by saying that the government has the money to keep the fuel subsidy. He is either bad in mathematics or intentionally misrepresented Petronas profits.

For an ex prime minister who had 22 years experience in running the nation he should know the nitty-gritty of economics and interpretation of financial statements. As an adviser to Petronas such blatant disregard for facts and figures is inexcusable.

Writing in his blog he said “Roughly Malaysia produces 650,000 barrels of crude per day. We consume 400,000 barrels leaving 250,000 barrels to be exported. Our 250,000 barrels of export should earn us RM27 billion.

“But Petronas made a profit of well over RM70 billion, all of which belong to the government. I feel sure that maintaining the subsidy and gradually decreasing it would not hurt government finances,”"Three years ago the selling price of crude was about USD30 per barrel. Today it is USD130 – an increase of USD100. There is hardly any increase in the production cost so that the extra USD100 can be considered as pure profit.

But Petronas made a profit of well over RM70 billion, all of which belong to the Government.

By all accounts the Government is flushed with money"Mahathir's above calculation is grossly misleading and most unexpected coming from someone like him, who is adviser to Petronas and one who knew the inner workings of government. The RM27 billion he calculated is gross sale not profit.

Below are details of the world prices of crude and the spot price of Malaysian Tapis for the period shown therein. Prices are not average but year end price. The annual average price would be much lower.

May 2008 126.06 138.43---------------------------------------------------------------------------The price reached US130. bbl only in May 2008.

Assuming we take the year end price between 2003 and 2007, the price for the period would be an untrue average of US$59.28 per barrel for Malaysian Tapis Spot. Let us assume the true average was US$50.00.

Assuming Petronas produced a daily average production of 600,000 bbl/day for the period, the annual gross sale of crude would be US$50 x 365 x 600,000. = US$10.5 billion before deducting operational costs, royalty to states and taxes.

Let us work out how much Petronas make between the period Mahathir left office and Abdullah took over the helm to the end of 2007.

Annual sale of crude US$10.500Less:5% royalty to states 0.525-----------9.975

Petronas annual profit attributed to export of crude oil between 2003 to 2007 was only RM15.96 billion not RM27 billion as made out by Mahathir. Petronas also generates profits from it other operations especially its LNG and refined petroleum operations. Its other profit centres are from its overseas operations in other countries. In 2005 its revenue was US$44.3 and made a net profit of US$11.6.

Petronas current crude production is in the region of 700,000 to 730,000 barrels per day. With the current high price of crude it probably can make RM60-70 billions from all its operations.

Malaysia's domestic consumption is in the region of 550,000 barrels a day and about 300,000 barrels of crude are imported to supplement the domestic needs .

It is obvious from the amount of domestic consumption which is almost 78 % of the total crude production it would be unwise to fleece Petronas to continue with the subsidy. It would be likened to "kill the goose that lays the golden egg" if the government were irresponsible and continue the subsidy just to be popular with the people.

During Mahathir's time when the price of crude was much cheaper, averaging less than US$20. per barrel , Petronas profits had been even smaller. He kept Petronas accounts a closely guarded secret.

Why did Mahathir keeps the accounts of Petronas a secret? It is obvious he didn't want Malaysians to know how the money was spent and what are the reserves left after the many bail outs of failed projects and insolvent financial institutions and financing of his grandiose projects. Petronas is also wasting money on prestigious and non-revenue generating projects such as the Petronas Philharmonic Orchestra and bankrolling the F1 races. Now he claims the government is flushed with money.

The price of crude reached its peak at the end of May but have eased slightly since then. Will the price breached the US$200 mark this year?

Much depend on how the recession set in the United States and whether there would be decline in industrial outputs there, in China, India and other industrialised countries. A deep recession in the US could trigger off a chain reaction to other countries that have huge trades with it. A prolonged global recession would certainly bring down the price of crude and other commodities due to less demand.

With the recent price hike would Abdullah be in serious trouble of losing his job?

Much depend on the loyalty of the 150 BN members of parliament. If they stay with Abdullah his position would be unshakable. No reason for them no to, as by now, they would have realised the false claims by Anwar of the 30 MPs joining Pakatan Rakyat. Many dates given by Anwar and his cohort Jefferey Kitingan had passed without any sign of those frogs making an appearance.

Anwar appears unsure whether he should stand in a by-election against the might of the BN machinery and take the risk of being trashed. He kept saying he is not in a hurry. It's now obvious why he wanted to take over the government through the backdoor. To be on the safe side he would only stand in a by election after formation of the government under the Pakatan coalition.

The chance of a back door take-over seems to be fading away as time goes by.

If he stood in a by-election and lost that would be the end of him and his Pakatan Rakyat and his dream of becoming prime minister.

Abdullah needs massive image reconstruction if he wants to stay in power. His popularity rating has slid further down after the price hike. He is in dire need of a cabinet reshuffle and should get rid of those lazy ministers who have done him more harm than good. He should disband his 4th floor academicians. They are probably better suited to give lectures in our local universities than dishing out advices to the Prime Minister. Those kiddies from Oxford and Cambridge have not shown their mantle. If they had, the Prime Minister wouldn't be in such predicament.

The recent price increase has not been given serious thought and no campaign has been carried out to bring awareness to lessen the shock to the general public. The government should have used the mass media to advertise and dish the dirt out to the people on why the nation needs to reduce the subsidy, at least for six months before the date of implementation. It is obvious his cabinet ministers and public relation officers are not doing their jobs.

After asking the people to change their lifestyle and tighten their belts the government, likewise, must now go on an austerity drive starting with the Prime Minister leading the way by example.Abdullah should cut down his overseas trip to the absolute minimum. Flying a big private jet is a very expensive affair, where possible he and his deputy should reduce the size of their entourage and used smaller jet or take commercial flights.

Ministers and civil servants should also curtail their overseas trips unless absolutely necessary. Many jaunts overseas had been known to be paid holidays under the guise of fact finding tours or working visits.

Ministers and senior civil servants should switch over to using smaller cars to conserve fuel and reduce government spending.

There are many more things that the government could do to send the message to the people that they are equally serious in cutting costs to reduce the burden on the people.

Abdullah taking this unpopular decision should be viewed positively. It means the man is not afraid of losing his job.

With the oppositions not showing any responsibility, inciting the people to take to the streets to demonstrate, will Abdullah reverses his decision again or send the water cannons and teargas?

A lot of talk and a lot of numbers. At the end only Mahathir as the former PM and Pak Lah knows what Petronas really makes. There are also royalties from other oil companies. Make Petronas accounts public then no arguement...